Abstract :Concerns about sustained adverse growth effects of real appreciation have been explored for many years. The debate continues
today, including with related recent literature that proposes further links between the real exchange rate and growth. Empirical
studies of Dutch Disease have focused mainly on how shocks that cause real appreciation may affect the level of traded goods
production rather than on whether this sector has a special role in economic growth, or whether it is permanently damaged by
temporary episodes of real appreciation. Moreover, although the literature on real exchange rate and growth suggests that an
overvalued exchange rate hinders growth, Dutch disease is in principle an equilibrium phenomenon reflecting changes in
fundamentals, and not necessarily imlying an overvaluation.
This study shows that, on the one hand, Dutch disease does exist; on the other hand, exchange rate volatility hampers economic
growth. Misalignment of the real exchange rate from its fundamental value also lowers growth. Overvaluations are always
negative for economic growth, whereas the evidence on undervaluation is inconclusive. In this context, the challange for policymakers
is to adequately manage the boom and its accompanying risks. Therefore, the optimal policy response would consist of
taking advantage of the boom, while at the same time dealing with its undesired consequences.